When going for growth, all roads — that is, all smart business practices — get you there: Innovation creates new products and services, capital funds new plants and equipment, operating efficiency generates margins and competitive advantage, and marketing excites customers new and old.
But for middle-market companies opening new markets is more than twice as important as innovation, the No. 2 factor.
On June 23, British voters approved a referendum to withdraw from the European Union and the unexpected result sent shockwaves through financial markets.
What we haven’t heard much about is the likely impact of Brexit on U.S. companies. The U.K. is the third-largest trading partner for midsized U.S. companies (after Canada and Mexico), and a base from which many companies do business with the continent.
Taking the pulse
The National Center for the Middle Market, part of the Fisher College of Business at The Ohio State University, surveyed 550 middle-market executives a week after the Brexit vote. The complete survey results are at http://bit.ly/2cz4Fr0, but here are highlights of how American Main Street businesses plan to respond:
- Fifty-one percent of companies say Brexit will have little to no impact on their business.
- By the same token, half foresee at least some impact. Indeed, 28 percent say it will be very significant, and 13 percent — 1 in 8 — believe the effects will be extremely significant.
- The biggest consequence is likely to be on investment plans. While most CEOs say these won’t change, 28 percent plan to shrink that portion of their investment budget that would otherwise go to Great Britain, and 21 percent will reduce investments in the rest of the EU.
- Middle-market CEOs also expect sales to Britain to decline. And, somewhat surprisingly, 1 in 5 say U.K. purchases are likely to fall, too, despite a weaker pound sterling where British goods are cheaper. The explanation: the hassle factor from the presumed need to deal with new customs and other regulations. Middle-market companies value simplicity. They will pay a higher sticker price to save on transaction costs.
The silver lining
If investments, shipments and purchases aren’t going to the U.K., where will they go? Home. If there’s a Brexit winner, it appears to be the U.S. While 28 percent of executives plan to reduce U.K. investment, 26 percent say they’ll increase it at home.
Manufacturers, a key part of Ohio’s business mix, are a little different: They are slightly more likely to decrease investment in the U.K. But when it comes to putting the money to work elsewhere, they are as equally likely to move it to Asia, as bring it home.
We won’t know if these intentions will turn into realities for some time. But if so, the result might actually drive American middle market growth higher, at least in the short run — domestic market expansion is an even more important factor than globalization. What the U.K. may lose, the U.S. may gain.
Thomas A. Stewart is the executive director of the National Center for the Middle Market, the leading source for knowledge, leadership and research on midsized companies, based at the Fisher College of Business, in collaboration with The Ohio State University. Thomas is an influential thought leader on global management issues and ideas — an internationally recognized editor and publisher, authority on intellectual capital and knowledge management and a best-selling author.